Where will next-generation working capital take us? - ICC panel

What does the next generation of working capital look like?

Four experts gave us their view of where next-generation working capital is heading, two from banks and two from non-bank lenders. They spoke at a panel for the International Chamber of Commerce Global Finance Forum.

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Our lending experts said borrowers are looking for products that are both easy to access – such as being embedded in a purchase journey – and quick to set up, with minimal documentation. For lenders, access to live data is key, they told moderator Roger Vincent, who is Trade Ledger's Managing Director, UK & Ireland.

Martin Hyde, Executive Director at J.P. Morgan, said embedding the provision of working capital is big:

"Buyers can get 60-90 days’ credit at the point of sale, and make a decision there and then. Compare that to submitting their historical accounts - that’s no use!”

He said that many businesses have started selling online, and they are looking to borrow and repay using their ecommerce revenues. “Businesses make payments all day. If you can embed lending and working capital, it’ll benefit them hugely. There’s always a need for small businesses to access longer-term finance, to make significant investments, not closely linked to payments. But for working capital, it makes sense to offer finance where the business is – generally in payment flows. Merchant cash advances will be really important. ”

Opportunities in invoice finance

Borrowers are ready to adapt. Amanda Rollason, Head of Underwriting at Sonovate, which provides invoice funding for the contingent labour market, said:

"We’re seeing businesses become much smarter in using their working capital. Businesses are starting to use smaller funders for specific needs. Invoice finance was traditionally quite laborious, but companies like ours are looking at different ways to build in flexibility. It’s what customers are looking for.”

Conrad Ford, Chief Product Officer at Allica Bank, said:

"It’s an exciting opportunity to nail the invoice finance products that replace the overdraft. Adoption among corporates is high, but only about 20k of the 2-3 million SMEs that could adopt it in the UK have done. There’s an opportunity, using live transactional data. A huge number of businesses discovered digital during the pandemic, and SMEs are now more receptive to digital.”

Conrad explained this in detail in a guest blog, A golden age for invoice finance.

Benefits of sharing data

Culture change is needed if businesses are to make the most of digitalisation. Amanda said: “The UK has a culture of not sharing data; in the US you can’t get any data. Until we can overcome this, it’ll be hard to fully embed finance.”

Deborah Hutchinson, Senior Partner at business working capital specialists, Channel Capital Advisors, pointed to some big benefits of data sharing: "We get open banking data, with APIs to collect it, and make quick decisions. But we want to give insights back to businesses and make it more of a relationship. We can give them incentives: we’ve developed an ESG-focused product to really help businesses be responsible, and to work with them, looking at their data, to see how they can improve their scoring." She added:

"We have investors who'd be interested in ESG compliant businesses and funding them at a more attractive rate.”

The next decade in working capital

“Trust and takeup will accelerate,” said Deborah. “At the moment there’s a fear of new products. But if people are asked to open their data to us and see that it gives them a quick, flexible response, they’ll be accepting of it. If they see immediate, tangible benefits, it will escalate. Banks will have to adapt to similar decision-making.”

The industry has to simplify its propositions, said Conrad: “A merchant cash advance is just a loan where you repay a percentage of your revenue. We’re trying to remove jargon and say, ‘Tell us about your business and what you want to achieve’, rather than asking ‘which product do you want?’.”

J.P. Morgan is a universal bank, and, said Martin, “the way we need to work is to buy or partner, for example with fintechs, to offer something cutting-edge to clients, rather than doing it all ourselves.”

Digitising in days

Conrad commented that digitising is easier than some believe. “When traditional financial institutions try to do digital, they see it as a binary. The reality is that you can move forward digitally in days or weeks. It’s the small steps that have the biggest impact.”

To find out more, including what the connection is between embedded lending and buying a van for business 20 years ago, watch the recording - or contact us for a chat.